A Closer Look at the 200-Day Moving Average

One of the quick-and-dirty tools used to technical analysts is to see where a stock or index is compared with its average price over the past 200 days. This is an easy way to get a read of a stock’s momentum.

Yesterday was a big day for the 200-DMA world. The S&P 500 closed above its 200-DMA for the first time since December 26, 2007. That closed out the index’s longest run below its 200-DMA according to my records which go back to 1932.

That streak, however, is still well short of the longest run above the 200-DMA which ran from November 1953 all the way to May 1956. Since the index has gone up over the time, the “above” streaks tend to be longer than the “below” streaks.

On November 20, 2008, the S&P was a stunning 39.6% below its 200-DMA. That’s the biggest discount on my records. The only thing that comes close is the reading from this past March.

So does the 200-DMA work? The evidence suggests that it’s a pretty good indicator of future price performance. When the S&P 500 has been below the 200-DMA, it’s dropped a total of about 20% over the equivalent of 27 years. In other words, the S&P 500 has been below its 200-DMA about one-third of the time.

Historically, the best time to invest has been when the S&P is less than 1.7% below the 200-DMA.

When the index is above the 200-DMA, well, then everything looks much brighter. All of the market’s gain and then some have happen when we’re above the 200-DMA which occurs about two-thirds of the time.

The market seems to like nearly every point of being above the 200-DMA. Danger only clicks in when the S&P 500 is over 17.5% above the 200-DMA which is a very high reading.

Posted by on June 2nd, 2009 at 2:17 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.